PBMs, the pharmaceutical industry middlemen that negotiate drug prices and determine formularies for commercial payers and insurers, have been the subject of growing criticism for years. A measure of this criticism has been the action of the FTC which issued a scathing report in July 2024. This was followed two months later by a formal lawsuit against the three largest PBMs, Caremark Rx, Express Scripts and Optum Rx. The report laid out lack of transparency and numerous forms of self-dealing that included steering patients to affiliated pharmacies, limiting access to biosimilar medications in favor of more expensive branded alternatives and profiting from negotiating handsome rebates with manufacturers, in return for preferential tier placement of specific drugs. The lawsuit focused on these practices related to insulin.
Thus, it wasn’t surprising that the bipartisan Continuing Resolution HR II–initially offered and later abandoned to fund the government through March 2025–contained Section 227: Modernizing and Ensuring PBM Accountability. While it was defeated, this section of the bill was hailed by some commentators as offering sweeping and much needed reforms aimed at reining in PBMs. Given intense interest in PBMs it is likely that Congress will once again get around to addressing reform, and this is likely where they will start.
References to this legislation have suggested it is the answer to the demands for PBM transparency and reform. It is not.
Upon close inspection this legislation would have perpetuated some of the most suspect business practices of PBMs today. For example, manufacturers continue to pay rebates that are proportional to the price of a product in exchange for preferred positions on the plan formulary. The primary difference in the proposed legislation is that the rebates would go entirely to the plan sponsor, not split with the PBM. But the problem of rebates remains.
Rebates distort decision-making away from the value of the drug for the patient toward the value of the transaction for the PBM and the plan sponsor. Such payments look a lot like pay-to-play. The practice ultimately translates into higher costs for enrollees. Decisions about formulary placement should be based on the transparent, economic and clinical value of a given drug.
Patients get charged a co-pay that is a percentage of the list price of the drug, before rebate discounts are taken into account. If the list price of a drug is $500 per month, and the patient has a 20% co-pay, the patient pays $100 at the pharmacy window. If the rebate discounts the drug to $250, the patient doesn’t see any savings.
Rebates received by PBMs from manufacturers have been shared with their large company clients. The split is negotiated. Small and mid-size businesses typically receive nothing. The HR manager decides how that rebate will be used. It might be used to lower premiums or co-pays or to fund the holiday party.
Not surprisingly, industry insiders say that employers like rebates and value the freedom to use them as they choose. Who wouldn’t want a big check at the end of the year? Employees don’t typically see a reduction in the cost of the drugs they buy or the premiums they pay. The proposed legislation did not address these legitimate concerns and was silent on the harm experienced by patients due to existing PBM business practices.
In fact, the proposed legislation is likely to make the current situation worse. The bill stipulates that PBMs should receive no income other than “bona fide service fees.” These can be flat dollar fees and incentives. PBMs perform a service and like other businesses should be compensated at competitive market rates. They populate the formulary for plan sponsors, negotiate prices with manufacturers to get the best value for drugs on the formulary and they reimburse pharmacies for dispensing drugs for covered individuals.
The problem of what constitutes a competitive market rate (or fair market value) for these fees has been left to the Secretary of Health and Human Services. There is no place for competitive market forces to determine FMV in this structure. And incentives, including rebates and other discounts, can still be calculated as a percentage of a drug’s price.
Lack of transparency in business operations, one of the criticisms leveled at PBMs today, is not addressed in the bill. Instead, the bill requires extensive reporting by PBMs at the patient transaction level separately by drug, dose, cost, where the drug is purchased etc. for every plan. Such extensive minutiae level reporting is likely to drive costs up and does not increase transparency. Pages upon pages of detailed reporting requirements are outlined without rationale and a defined outcome. The net result is overwhelming activity without benefit for patients.
Laws typically come with associated funding, and this bill is no exception. In fact, over $130 million was made available for the Secretary of HHS and Office of the Inspector General to use to administer the act in 2025 in addition to other available funds, despite the fact that it doesn’t take effect until 2028. The legislation didn’t mention future budgets, but they’re not likely to be smaller.
The time is right for PBM reform, but the American people might be better served if Congress goes back to the drawing board and takes a different approach, one that is less bureaucratically prescriptive but enables change. Congress needs to be clear about the problem it is attempting to solve. We need reform but this is not it. It appears to be a smokescreen for business as usual and likely at a higher cost.
